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Tuesday, March 26, 2013

Shift all gears, not just some

Hitherto, the pronouncements by the Government on its economic plans, and what it will take to realise those goals, have been addressed to private sector firms and to private sector labour.

They are being encouraged to become more productive, more skilled and move into more valued-added activities.

Deputy Prime Minister Tharman Shanmugaratnam has spoken in terms of the need to “shift gears”. I make the case that such a shifting has to occur in both private and public sectors.

As argued in my first article yesterday, we should shift from an intense emphasis on value-added gains to an emphasis on value creation. Value creation is about human capital, since ideas come from people not machines. In a scarce labour environment, we need to allocate our limited human capital effectively to avoid a crowding-out effect or other distortions.

PRODUCTIVITY IN GOVERNMENT

The public sector is the largest employer of total labour in Singapore and of resident labour by far.

According to the Manpower Ministry, in 2011, the total size of the labour force was 3.327 million, while the size of the resident labour force was 2.08 million. The public service sector formed approximately 3.95 per cent of the total labour force but 6.3 per cent of the resident labour force. This is before including those serving in the military.

This figure is low compared to many other advanced countries which typically have public sectors exceeding 10 per cent (sometimes much more) of total employment.

However, we should not excuse ourselves from the need to urge more productivity in and of government just because of this favourable comparison.

The exceptionalism of our circumstances means that we have to squeeze our productivity gains at the system level of the economy.

To date, the Government has 16 ministries and more than 50 statutory boards. This is in addition to the uniformed services and organs of the State. In a scarce labour environment, it should be asked how we can make government more productive in line with its expectations of the private sector.

Even while some segments of the public sector need to grow to meet demands from driving forces such as ageing and healthcare, surely trade-offs can be made, and have been made, by re-prioritising other public policies.

It would be absurd if all public policies and programmes, historical, current and future, enjoyed similar labour prioritisation in a contemporary world where the Government acknowledges that the principal factor input limitation is labour.

A PROBLEMATIC DICHOTOMY

There is a stark dichotomy in the Singapore labour market.

First, the concentration of resident labour in the public sector could add to the challenge of hiring in the private sector market, where hiring supplementary foreign labour is indexed, through the Dependency Ratio model, to hiring of a base of residents.

Second, whereas the private labour market is risk-loaded for employees, given that it is exposed to the travails of competition, the public labour market is relatively risk-free for staff. This could create a wall of disgruntlement.

Third, even where it is judged absolutely necessary to add employment to the public sector, we should not fall into the trap of assuming the Government creates jobs in the same way the private sector does.

Government employment should be about meeting the needs of the citizen; more such employment reflects an expansion of needs. Private sector jobs are about fulfilling economic functions; more such employment reflects an expansion of growth.

Growth is the means to financing expansion in the public sector, and not the other way around.

RIGHT-SIZED AND SMARTER

A right-sized and smarter public sector footprint would be helpful in several ways.

First, it is important for the Government to set an example for what it expects of the private sector. It must also make trade-offs, find efficiencies, create more flexibility in its labour pool so that it can cross-flow from lower- to higher-priority functions over time, and even inflate and deflate as circumstances require.

This would help build a sense of labour solidarity between private and public sector employees that they are facing similar risks. It would also ensure that policymakers are not making labour and economic policy divorced from a visceral appreciation of the policy conditions.

Second, it would avoid crowding out the private sector in the competition for scarce labour. More particularly, we must avoid a situation where talented and highly educated young Singaporeans, uncomfortable with the vicariousness of the competitive private sector, seek shelter in the public sector where jobs are secure and wages (particularly in the starting grades) competitive.

If too much talent flows into the Government, it can stall value creation simply because there is no impetus.

Third, we have to restrain the sense that just because we have the fiscal means or that there are strong drivers of demand, we should expand the public sector. This can happen in specific pockets but, at the system level, we should keep an eye on total growth of the Public Service.

RETHINK SECTOR CHAMPIONS

The Government has a history of establishing sector champions to drive advancement of specific economic sectors which it deemed desirable for the larger economic success of Singapore.

However, it may be time to revisit the premise for some of these sector champions, in the light of the restructuring that needs to occur.

An example would be tourism. In the 1970s and 1980s, tourism was judged an important sector because it brought in hard currency, marketed us to the wider world and created employment. It also generated investment to build hotels and impetus for public investment in tourist features such as the zoo and bird park, which had spin-off benefits for Singaporeans. The Singapore Tourism Board was established to champion the sector and it has done, and continues to do, an excellent job.

However, we are now in an environment where tourism jobs are largely low- or semi-skilled, and the sector as a whole is low value-add compared with knowledge-based sectors such as finance and information technology.

In 2010, the Ministry of Trade and Industry released a paper which claimed that tourism generated over S$8 billion in nominal value added in 2010. It also noted that “tourism is an important component of Singapore’s economy, contributing towards both gross domestic product and job creation ... Beyond (value-added) and job creation, tourism also brings about intangible benefits.

“Specifically, by raising Singapore’s visibility and profile through iconic events and tourism infrastructure, Singapore could become a stronger magnet for global talent. With more global talent relocating to Singapore, our economy would become even more dynamic and be able to continue its move up the value chain.”

This could all be true. However, tourism also comes with a large land footprint for hotels and facilities. It also adds to loads on our infrastructure. And employment in the tourism industry, as should be clearly visible to anyone visiting hotels for weddings or to patronise the amenities, is mostly made up of foreign labour.

CHANGE IS HARD

Singapore is no longer a stranger to the wider world, and we have a surfeit of hard currency flows given our strong position as a financial centre. Such “intangible benefits” that may arise from any particular sector must be netted in a trade-off calculus at the economy level.

In short, to win at the total economy level, we need not win in every sector. We have to prioritise and that involves ensuring that bureaucratic and policy inertia is held in check.

We need to recalibrate our emphasis on boosting specific sectors with a wider and longer view at the economy level. This may mean performing the novel action of cutting back on niche success in order to succeed at the system level.

Given the non-trivial presence of the public sector as both an economic actor through its policy action and as an employer, shifting gears at the economy level requires the Government to play its part alongside the private economy, not just through the private economy.

As acknowledged in Budget 2013, change is hard. Harder still, is when it has to start from within.

ABOUT THE AUTHOR:

Devadas Krishnadas, a social and political commentator, is the director of a foresight consultancy. This is the second of a three-part series.